Road to EMU: Do We Need a Flexible Exchange Rate?

The authors consider the current exchange-rate regime in the Czech Republic as the Czech economy prepares for entry into the EU and the EMU. The macroeconomic impacts of a single-currency regime are classified according to traditional OCA theory. Using quantitative measures, the authors find the degree of macroeconomic convergence between the Czech and German (EU) economies sufficient enough to preclude major obstacles to the implementation of a fixed-currency regime in the Czech Republic. Also examined are the transitional specifics of the Czech economy. The paper analyzes the real appreciation of the Czech currency and its competitiveness and finds that the development of cost factors exert depreciationary pressures on the exchange rate. Conversely, a fixed regime might alleviate problems related to the influx foreign capital and consequent nominal appreciation?an idiosyncrasy of the Czech economy. However, once labor market rigidities are removed, a fixed regime offers the Czech economy a basis of sustainable competitive advantage, growth, and convergence to the EU.